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Governance and Illicit Financial Flows

Melvin D. Ayogu and Folarin Gbadebo-Smith

October 2014

WORKINGPAPER SERIES

Number 366

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GOVERNANCE  AND  ILLICIT  FINANCIAL  FLOWS*  

Melvin D. Ayogu† and

Folarin Gbadebo-Smith‡

September 2014

Abstract

Insofar that it corrodes governance, engendering opportunistic crimes, grand corruption lies at the core of the problem of illicit financial flows. We identify at least two likely antagonistic circles in the illicit flow process—a virtuous circle and a vicious circle—both rooted in one common factor, namely, the strategic complementarity between corruption and governance. Also, we consider the scope of global governance architecture in encouraging banks to “do the crime, pay the fine, and do no time.” Given this structure, the observed, rampant impudence of banks’ participation in illicit financial flows is understandable and society would not be shocked should global mega-banks increasingly resemble a police establishment run by ex-convicts. Curbing illicit flows in such a circumstance would be daunting. Therefore, civil society must live up to its civic responsibilities by displacing the vicious cycle first through creating the right incentives for politicians to identify negatively with illicit financial flows. Key Words: Capital flight; illicit financial flows; Africa; sub-Saharan Africa; governance; corruption

JEL Classifications: G11; O55; E61

                                                                                                                         * This paper is forthcoming in Ajayi, S. I. and L. Ndikumana (Eds.) (2014) Capital Flight from Africa: Causes, Effects and Policy Issues. Oxford: Oxford University Press. The book contains thematic chapters from a project of the African Economic Research Consortium on “Capital Flight and Tax Havens in Africa” supported by generous funding from the Norwegian Agency for Development Cooperation (NORAD). † School of Business Administration, American University of Sharjah, United Arab Emirates, and Adjunct Professor, Graduate School of Business, University of Cape Town, South Africa, South Africa; Email: mayogu@aus.edu ‡  Center for Public Policy Alternatives (CPPA), Lagos, Nigeria ; Email : f.gbadebo-smith@cpparesearch.org

1. Introduction

What does $1,000 million or one billion dollars of stolen public money mean to the village

blacksmith who molds farm hoes or sears cutlasses in a village in a poor developing country?

Not much. Presumably, he is not able to get his head around such colossal amount of money,

which in all likelihood does not exist in the numerology of his vernacular. By contrast, the

following cost and benefit calculus is sure to capture the blacksmith’s attention:

The amount of money an emir expends on a single trip to Europe for medical check-

up would build a clinic big enough to serve a community of 5000 people; the amount

of foreign exchange a top civil servant pays yearly to educate a single child abroad

would build a primary school capable of providing basic education to hundreds of

pupils;… is enough to establish community banks and provide access to capital for

thousands of small businesses or fund poverty alleviation projects in several

communities (Suleiman, 2012, p. 1).

In 2010, shortly before Suleiman (2012) expressed these views, the adverse consequences of

illicit financial flows on economic transformation and human development in Africa were

brought to the attention of regional policymakers by three economists, namely, Melvin

Ayogu, Raymond Baker, and Léonce Ndikumana during a side event. More specifically, a

panel discussion to alert policymakers to the problem was organized at the 43rd Session of

the Commission/3rd Joint Annual Meetings of the Africa Union (AU) Conference of

Ministers of the Economy and Finance and the United Nations Economic Commission for

Africa (ECA) Conference of African Ministers of Finance, Planning, and Economic

Development held in Lilongwe, Malawi, March 29–30, 2010. After examining the issues at

stake, conference participants called upon the ECA and the AU to lead the effort to combat

illicit financial flows from Africa. Following a resolution passed by these ministers, a “High

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Level Panel on Illicit Financial Flows from Africa” (hereafter “High Level Panel”) was

established by the ECA and inaugurated on February 18, 2012 in Johannesburg, South

Africa4 It is envisaged that the High Level Panel would work to increase collaboration and

cooperation amongst African countries, their regional economic communities, and external

partners to promote better global understanding of the scale of the problem for African

economies as well as encourage the adoption of relevant national, regional, and global

policies, including safeguards and agreements to redress the situation.

One should emphasize that although illicit financial flows create serious problems for the

financing of development in many poor countries, including those in Africa, that fact alone

does not guarantee that policymakers will take steps to curb the problem. Whether or not the

problems of illicit financial flows attract the attention of governments depends crucially on

the linkage(s) between the consequences of illicit financial flows and the political fortunes of

policymakers (domestically and globally), including the interests of global actors. 5

Nowadays, global actors comprise individuals whose domicile is external to nation-states as

well as those domiciled within nation-states who, in catering to global constituencies,

necessarily play on the global platform.

In this connection, it is pertinent to note that some of the studies Ajayi and Ndikumana

(2014), as well as others in the literature (Stephenson et al., 2011), suggest that the roots of

illicit financial flows appear to lie in the structure of governance. We extend this idea by

postulating that, although rooted in governance, the persistence of illicit financial flows

depends on both domestic and international actors, and therefore on international political

economy, in addition to the structure and functioning of global (financial, legal, and political)

organizations. Many argue that the drivers of illicit financial flows are rooted either in micro-

                                                                                                                         4 Economic Commission for Africa (2012), p.1. 5 For an elaboration, see for instance Ayogu and Gwatidzo (2011) and references therein.

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foundational issues, such as the outcome of individual portfolio choices, or in macro-

foundational issues, such as macroeconomic instability or low economic growth. On the

contrary, some African countries have had more financial hemorrhage during periods of

economic growth. For example, estimates of the size of illicit financial flows from Africa

during the period 1970–2010 (Ndikumana and Boyce, 2012, pp. 19-22) show that primary

commodity booms have been associated with higher illicit financial flows.

In line with our postulate that governance—global and local—is an essential element in

curbing illicit financial flows, this paper explores the nexus between governance and illicit

financial flows. It  especially  emphasizes  that  grand corruption is at the core of the nexus of

governance and illicit financial flows,  as  it  corrodes governance, which in turn engenders

opportunistic crimes. Grand  corruption  is  both  a  profitable predicate crime  and  a  constraint  to  

enforcement  of  rules. The  analysis  in  this  paper  uncovers  two antagonistic circles in the illicit

flow process—a virtuous circle and a vicious circle,  which  are  both rooted in the strategic

complementarity between corruption and governance:  While  good governance curbs

corruption  (the  virtuous  cycle),  corruption corrodes governance because poor governance

enables corruption  (the  vicious  cycle).  The  analysis  is  supported  by  empirical  evidence  from  the  

literature  as  well  as  illustrations  from  country  case  studies.    

The rest of the paper is organized as follows. Section 2 discusses illicit financial flows in

greater detail to strengthen our appreciation of the phenomenon and clarify some key

concepts associated with it. Section 3 defines governance as used in this study and develops

an understanding of the linkages between governance and illicit financial flows. Section 4

concludes and suggests crucial next steps in the fight against illicit financial flows.

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2. Definition, typology and scale of illicit financial flows

As the review in Ajayi and Ndikumana (2014) makes clear, the depth and scope of the

literature on illicit financial flows in developing countries, including those focusing on

Africa, is thin. However, the Afrocentric strand— Kar and Cartwright-Smith (2009),

Ndikumana and Boyce (2003, 2011), and Boyce and Ndikumana (2001)—has made

significant progress in measuring the scale of the problem. Without serious scholarship on

measurement, creating awareness of the problem would have been more difficult due to its

clandestine nature, which lends itself conveniently to the denial of its existence. Therefore,

the contributions of previous studies that have sought to quantify the scale of illicit financial

flows cannot be understated.

Besides the literature on illicit financial transfers from African economies, several studies

examine the phenomenon from a global perspective (Reuter and Truman, 2004; Baker, 2005).

Within this genre, there are more specialized studies, such as those that pursue tax justice and

target tax dodgers.6 Others, such as those undertaken by the United Nations Office on Drugs

and Crime (UNODC) and the World Bank (2007, 2009), World Bank and UNODC (2011),

UNODC (1998) as well as Basel Institute on Governance (2009) pursue initiatives to assist

countries and communities, particularly developing countries, recover monies illegally

transferred from national treasuries by public officials and their co-conspirators.

Baker (2005, p. 23) defines illicit financial flows as “dirty money,” and dirty money as

“money that is illegally earned, illegally transferred, or illegally utilized.” He argues that “[i]f

it breaks laws in its origin, movement, or use, then it properly merits the label.” Some readers

may not agree with this definition, noting that some “dirty money” may not cross national

boundaries and therefore may not actually leave the economy or jurisdiction where the                                                                                                                          6 For a description, see Shaxson (2011).

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illegality occurred. If the money changes ownership (e.g., it is stolen from the national

treasury) but remains in the country, it is likely that the affected economy will not be

deprived of development capital. Thus, they argue that unless the money is transferred

outside the country (e.g., into an offshore account or invested in assets abroad), the

criminalized economy may not be subjected to the developmental consequences of illicit

financial flows. We need to be careful here. Money that changes hands from a legitimate

owner to one who illegally possesses it may still have negative consequences for the

economy even if the money is not taken out of the country. Individuals who steal money from

the government treasury (i.e., grand corruption) may be afraid to invest it openly and hence,

may not be able to undertake the types of investment projects that contribute to job creation

and economic growth.7

It is useful to make a careful distinction between dirty money and illicit financial flows for

the purpose of policy prioritization and the selection of appropriate intervention strategies.

Having appropriate conceptual understanding of the typologies of illicit financial flows and

their characteristics is also important in gauging the accuracy of estimates of the magnitude

of the flow, particularly as there are very limited means of judging the robustness of the

estimates. Consider, then, the example of a citizen who earns a salary legitimately, purchases

a gun, and commits a crime. Does this make his salary or payment to a licensed firearm retail

outlet dirty money or an illicit financial flow? Our point is that dirty money of the illicit

financial flow genre is a subset of all dirty money.

In their seminal contribution to the dirty money literature, Reuter and Truman (2004, p. 1) do

not define dirty money explicitly. Instead, they refer to its obverse, money laundering, which

they define as “the conversion of criminal incomes into assets that cannot be traced back to

                                                                                                                         7 We are indebted to John Mbaku for this insight.

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the underlying crime.” Thus, illegality (why you move money) rather than flows (how you

move money) is of essence in their characterization. In this framework, where the funds are

located is not as crucial perhaps as the source of the monies.

Other important contributions to the literature on illicit financial flows have come from

Global Financial Integrity (GFI), a Washington, D.C.-based organization that heads the Task

Force on Financial Integrity and Economic Development, which was established in January

2009 by a global coalition of civil society organizations and several national governments

“seek[ing] greatly improved financial transparency and accountability on an international

level.” The Task Force has been renamed The Financial Transparency Coalition (2013).8 GFI

pursues this goal through original research and by advocating for greatly improved

transparency and accountability in the global financial system. In their analysis, Kar and

Cartwright-Smith (2009) of Global Financial Integrity use the definition in Baker (2005), but

one of the authors of the report, Dev Kar, has elsewhere defined illicit financial flows as

involving “the cross-border transfer of the proceeds of corruption, trade in contraband goods,

criminal activities, and tax evasion” (Dev Kar, 2011, p. 3). His definition is useful because it

is operational and circumscribed, captures the essence of the definition of dirty money in

Reuter and Truman (2004), and can be applied for the purposes of policy intervention and

legal remedies. Since it is both operational and circumscribed, it is also useful in

understanding the scope of illicit financial flows.

In spite of the diversity of views on the nature of illicit financial flows, there is some

agreement in the literature around the scope of illicit financial flows in Africa, emphasizing

two critical parameters identified in Dev Kar (2011), namely, cross-border movements and

the nature of the money. In other words, the provenance of the money and how it is moved

                                                                                                                         8http://www.financialtransparency.org/about/overview/

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are important. To the extent that the origin of the money can be expected to influence the

decision on how the money is moved, the pattern of behavior defined by the acquisition and

the manner of transfer is informative in trying to establish the nature of a financial flow.

Table 1 uses a 2x2 matrix of dimensionality to classify the nature of a financial flow.

INSERT TABLE 1 HERE

We would like to reinforce the discussion of the nature of financial flows by drawing lessons

from an important legal precedent. In Cuellar v. United States, 553 U.S. 550 (2008), a case

that was heard on appeal to the U.S. Supreme Court involving the provision of money

laundering statute 18 U.S.C. §1956(a)(2)(B)(1) prohibiting international transport of the

proceeds of unlawful activity. Regaldo Cuellar was arrested and charged with money

laundering after police found nearly $81,000 hidden in a secret compartment beneath the

floorboard of a car that he was driving through Texas to Mexico. Cuellar was later convicted

of money laundering but an appeals court overturned the conviction. The appeals court held

that in order to secure a conviction under the federal money laundering statute, the

government had to prove that the defendant was trying to depict the money as “legitimate

wealth,” not merely show that the defendant tried to hide it. The government appealed to the

U.S. Supreme Court. The unanimous opinion was written by Justice Clarence Thomas. The

Court overturned Cuellar’s conviction and held that the money laundering statute does not

contain a “legitimate wealth” requirement and that the mere proof that a defendant had

attempted to conceal the money is not enough to uphold a conviction for money laundering.

Referring to the language of the statute, the Court stated that the government needed to prove

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that in transporting the money, the defendant intended to conceal, not just the money, but also

the nature, location, source, ownership, or control of the money.9

But why are money laundering and the requirements for establishing the crime in the United

States important for the fight against illicit financial flows from Africa? Specifically, why are

legal precedents in the United States and other countries pertinent to the fight against illegal

money transfers in Africa? Beginning with the latter question, foreign legal precedents matter

because illicit financial flows of relevant in Africa are predominantly international

phenomena. Since the transport of stolen monies or illegally-obtained assets across national

borders involves multiple jurisdictions, the effective control of such activities cannot be

undertaken without the consideration of the interdependencies inherent in the process.

Effective and full prosecution of money laundering cases usually involves tracing and

identification, a process that may require interface with multiple jurisdictions, which in turn

requires an understanding of their protocols.

To the question of why money laundering is archetypical, it should be noted that it, as a

business, stands at the epicenter of the entire criminal enterprise because a criminal’s ultimate

desire it to legitimize the payoff from crime; for that is when crime really pays. In other

words, when a criminal can successfully distance the crime from the proceeds (dirty money),

yet have unfettered access to the clean transform of the dirty money. Mindful of this

aspiration, law enforcement authorities in the United States have made money-laundering

charges a potent prosecutorial tool (Leibman, 2010). The charges “generally carry far more

severe sentencing exposure” (Leibman, p. 1) than the underlying transgressions (predicate

offenses) that generated the proceeds. Conviction for money laundering also allows

prosecutors to threaten forfeiture of the stolen money or its transform, all of which happen to

                                                                                                                         9 We thank John Mbaku for elaborating the essence of the burden of proof as required by the law.

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be important points to consider in stolen asset recovery initiatives in developing countries.

Therefore, measures that diminish money laundering also lower the likelihood of illicit

financial flows.

Baker (2005, pp. 49, 72) identifies three major types of illicit financial flows based on the

perceived extent of potential criminality of the activities: (1) near-universally accepted

criminal activities; (2) conditionally criminal activities; and (3) unlawful activities that are

not universally criminal, but carry that potential depending on the jurisdiction. Predicate

crimes, such as drug dealing, bank fraud, and terrorism, are elements of near-universally-

accepted criminal activities. Bribery and corruption are elements of conditionally criminal

activities simply because the type of behavior that qualifies as corruption can vary across

jurisdictions. In Germany, for instance, there are concerns about “active” and “passive”

bribery as well as the matter of bribing politicians.10 In the United States, the bribery of

foreign public officials by U.S. legal and natural persons in international business

transactions was outlawed in 1977 with the Foreign Corrupt Practices Act. Similarly, in

Europe, the OECD Convention on Combating Bribery of Foreign Public Officials in

International Business Transactions began to change how bribery was treated in these cases.

Many Europeans countries began to amend their domestic laws to bar the payment of bribes

to foreign public officials in international business transactions. Other knotty cases in this

category can include an imaginary Miss X who stuffs her considerable life savings into a

suitcase (as a portfolio choice) and discreetly transports the stash internationally without

declaring the money as required by the authorities in both the source and destination

countries. While Miss X’s life savings are proceeds of a legitimate enterprise over a lifetime,

the manner in which these funds are transported violates some currency or exchange control

regulation. Thus, having violated the law by not declaring the funds to authorities makes the                                                                                                                          10 See Wolf ( 2006) and Peter Eigen, “How to Expose the Corrupt,” available at www.TED.com.

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money “dirty” according to Baker’s definition. Finally, trade mispricing is an example of

illegal activities that are not universally criminal but are largely aimed at evading taxes. On

this point, Reuter and Truman (2004, p. 11) note that while it is tempting to claim that no

taxes are paid on proceeds of unlawful activities, there are exceptions, such as when an

“offender chooses to launder criminal earnings through a legitimate business and pay taxes.”

Similar to their treatment of the nature of dirty money, Reuter and Truman (2004) take a

functional approach to the classification of illicit financial flows in contrast to our earlier

classification of all cross-border flows (licit and illicit). Their classification is driven by the

need to understand the effects of particular money-laundering controls and hence contribute

meaningfully to policy choices. They identify five distinct categories subject to further

consolidation depending on the purpose at hand; specifically, these are drug distribution,

other “blue-collar” crime, “white-collar” crime, bribery and corruption, and terrorism.

Clearly, bribery and corruption can be viewed as other “white-collar” crime, whereas

terrorism can be both white-collar and blue-collar, as in cyber-attacks and physical attacks,

respectively. Furthermore, as a way of highlighting the usefulness of approaching the

profiling of illicit financial flows by focusing on the potential of each approach to better

inform policy choices, Reuter and Truman (2004, p. 40) note that “the benefits from reducing

white-collar crime by 1 percent might be seen as substantially less than those associated with

a similar reduction in drug trafficking. The distribution of the benefits from reducing either of

the two types of offenses may also be quite different: those who are harmed by drug

trafficking are disproportionately from poor and minority urban populations, while the costs

of white-collar crime are borne far more broadly across society.”11 As shown in Table 2, we

                                                                                                                         11 In practice, things are not so clear-cut. For instance, the shutdown of a business due to a white-collar job can lead to severe collateral damages such as unemployment, drugs, prostitution, armed robbery, and all sorts of vices. In fact, this is the reasoning behind the “Arthur Anderson Myth” of the corporate death penalty, which we elaborate in Section 3.

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derive a 5x4 typology matrix of illicit financial flows by augmenting the five crime categories

delineated by these experts. These additional dimensionalities of predicate crimes,

differentiated into four contingencies, comprise the extent of the reliance on cash, the scale of

operations or quantities of monies involved, the severity of consequential damages, and the

segment of the population most affected (e.g., the distribution of the incidence of the

damages).

INSERT TABLE 2 HERE

3. Illicit financial flows and governance

The commonly known consequences of capital flight for capital-scarce regions can be

summed up as follows:

Resources available for development = domestic resources + resource inflows –

resource outflows.

According to this identity, the more resource outflows, ceteris paribus, the fewer resources

are available to be invested domestically for economic growth and development. The deeper

consequences of the outflows, however, are insidious and deserving of further investigation

and exposition. More formal analyses provided by Ajayi (2013), Nkurunziza (2013), and

Weeks (2013) in Ajayi and Ndikumana (2014) shed fresh light on the consequences of illicit

financial flows. The impact on governance is a consequence of illicit financial flows that is

less known, and to which we now turn.

3.1. What is governance?

We define governance as a composite of (1) structured arrangements between government

and the different spheres of society and (2) institutions, including public policies, that affect

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the well-being of society. Figure 1 illustrates this concept. By deliberately depicting non-state

actors (NSAs) as a solid and stable triangle sitting atop of it all, we emphasize that in

principle, power belongs to the people. NSAs comprise intergovernmental actors such as the

World Bank, United Nations (e.g., UNODC, ECA), AfDB, ECOWAS, AU, NEPAD, and

SADC; non-governmental and not-for-profit actors such as social media, academia, and

charitable agencies; business actors such as the print and broadcast media, as well as banks

and multinational corporations.12 In Figure 1, the three societal spheres include civil society,

government, and the corporate sector. A theory of the way in which these governance

arrangements work is provided by institutional economists such as Douglass North (1990,

1997).

INSERT FIGURE 1 HERE

According to North, “institutions are the way humans structure their interactions” (2002, p.

3). Formal rules are laws and regulations put in place by politicians who also specify how

they are enforced. Informal rules are norms, conventions, and “self-imposed codes of conduct

that govern much of human interaction but are also more complicated and little understood”

(p. 3). North postulates that the “mixture of formal and informal rules and enforcement

characteristics shape a society’s incentive structure” (p. 3). Enforcement relies on self-

enforced codes of behavior, second-party enforcement or retaliatory capabilities, and

government’s enforcement capacity or coercive powers. North cautions that developing

norms to complement third-party enforcement mechanisms can take a very long time (over

20 years), yet if informal rules do not complement formal rules, outcomes can radically

diverge from intended objectives. The informal rules are the elements that constrain behavior

                                                                                                                         12  UNODC is the United Nations Office on Drug and Crime; AU is the African Union; ECA is United Nations Economic Commission for Africa; AfDB is African Development Bank; NEPAD is the New Partnership for Africa’s Development; ECOWAS is the Economic Community for West African States; and SADC is the Southern African Development Community. For more on NSAs, see Pereira et al. (2011).

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much more than the formal rules, but unfortunately society is limited in its ability to influence

formal rules and enforcement (pp. 3–4).

North (1996, p. 346) argues that organizations, which arise in societies, reflect the

opportunities provided by each society’s institutional settings. If the institutional framework

rewards kleptocracy, for example, then thieving organizations will arise. The types of

political, economic, and social organizations that are spawned as people compete for survival

interact with the institutions that engendered them. This interaction between organizations

and related institutions in turn reshape the institutions over time in what can be viewed as a

process of institutional evolution. An example is regulatory capture, whereby regulators are

reoriented by organizations to serve the interests of those organizations rather than effectively

enforce the rules and regulations constraining the behavior of those organizations.

Specifically, regulatory capture is an outcome of the interaction between organizations and

institutions. The concepts of interaction and institutional evolution are important in

elucidating the relationship between governance and illicit financial flows.

3.2. The nexus of illicit financial flows and governance

Illicit financial flows are the proceeds of crime, and therefore require mapping to predicate

crimes. Understanding the relationship between illicit financial flows and governance

demands knowledge of the contours of the predicate crimes and the manner in which the

proceeds are camouflaged. The elaborate ways and means through which the proceeds of

crime are transformed to make them difficult to trace, as well as the varieties of avenues for

enhancing the criminal’s easy access to the clean form of the proceeds are a reflection of the

opportunities provided by a country’s institutional settings and thus implicates governance.

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Without claiming that almost all aspects of illicit financial flows map to governance

structures, we can point to credible connections between governance and predicate crimes,

such as tax evasion; between governance, money laundering, and proliferation financing; and

between governance and illicit financial flows in a self-reinforcing vicious circle.13 We

examine each of these three aspects in turn.

A. Governance and geneses of illicit financial flows: Predicate crimes

Some proponents of ultra-free flow of funds globally (e.g. Ajilore, 2005; Collier et al., 2001;

Cuddington, 1986, Deppler and Williamson, 1987) argue that such rapid movements must be

viewed as strategic reactions of economic agents to the caprices of the state.14 In such risky

economic and political environments, a predatory state or one lacking political order can

pounce on the economy by imposing controls for various reasons, including political

victimizations.15 These controls prevent economic agents from achieving maximal portfolio

diversification benefits. Knowing that agents can anticipate its move, the state acts fast. In a

chain of reciprocal expectations, foresighted agents reasoning recursively execute preemptory

strikes by moving their funds even more rapidly, while others, as an anticipatory move, never

keep any of their investible funds within their home country. The observable implications of

such moves, in some instances, are the so-called under-invoicing of sales or parking of sales

offshore, which we argue is essentially transfer mispricing. Altogether, we can envisage

agents seeking out other safe alternatives, some of which are illegitimate. For example, where

it is legal, dollarization allows residents to maintain Eurodollar deposits and where

                                                                                                                         13 Mindful that a theory that explains everything explains nothing, we are not attempting to claim that “fixing” governance will end illicit financial flows or that we presume to know how to fix governance. 14 The biggest, most successful proponents have largely waged an ideological war. See Shaxson (2011), pp. 193-214. 15 There is an alternative perspective on what is commonly labelled political victimization. Robert Bates (1981) views such a stratagem of “collective deprivation and selective benefits” as part of the repertoire of devices for disorganizing political opposition or for building support for an incumbent regime, calling it politics of divisibility.

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prohibited, the same rational economic pursuit becomes an illegal activity. In Nigeria for

example, a regulatory dispensation that allows the holding of foreign currency deposits

domestically is called domiciliary accounts. Such responses by economic agents’ to elements

of country risk nonetheless deprive the state of seigniorage revenue. To the extent that

increases in the demand for domiciliary accounts are responses to hostile investment

climates, the retributions are what can be expected in a market-related economy. Other

versions of the alternative narrative seeking to justify offshore havens as laissez-faire

instruments are described in Shaxson (2011, pp. 133–214). According to this view, profligate

fiscal expenditures that induce never-ending tax hikes with no tangible public benefits invite

citizens to vote with their pocket by moving their money away to jurisdictions outside the

reach of the state.

We do not contest views that capital movements are useful market instruments for

disciplining governments on the quality of their national economic policies. When investors

disagree with the direction of economic policy in a given environment, they should vote with

their feet by moving their investments elsewhere; very few will disagree with this basic tenet

of capitalism.16 However, if capital in search of lower risk-returns is on a legitimate mission,

it should have no compelling reason to be secretive or invisible, particularly given that tax

avoidance is a legitimate purpose. For this reason, the growth in the scale, complexity, and

ubiquity of secrecy jurisdictions worldwide require explanations beyond the legitimate goals

adduced by proponents of the portfolio choice view of capital movements. The Economist

(2013) makes a similar point with regard to the future and continued justification for offshore

financial havens. Focusing on Switzerland, “still the world leader in wealth management,

looking after $2.1 trillion in assets,” the article predicts that “the next few years will provide a

                                                                                                                         16 This is the portfolio-choice argument of which there are few disagreements. See Hermes et al. (2002) and Collier et al. (2001).

17    

17    

stern test of the Swiss brand in private banking. They will have to show that the selling points

they have long touted—political and economic stability, top-notch service, and a holistic

investment approach—count for more than the ability to hide money” (p. 2).

Having acknowledged possible reasons rooted in the quality of governance that can account

for illicit financial flows and their machineries, we now present in the rest of the paper an

alternative narrative of the genesis of governance and illicit financial flows that makes it

difficult to reconcile the portfolio choice explanation with the machinations and

manifestations of illicit financial flows worldwide. We note that the genesis of drugs,

organized crime, racketeering, murder, kidnapping, armed robbery, smuggling,

embezzlement, cybercrimes, fraud, and even transfer mispricing may not be due directly to

poor governance, even though good governance is a moderating influence. Thus, we consider

these white- and blue-collar crimes as second-order linkages with governance. For this

reason, we integrate their discussion into the governance-money-laundering node in section C

where they are aptly feastured as the underlying criminality to the proceeds being “cleaned.”

Terrorism and proliferation financing will be addressed under money laundering as well,

since both crimes are largely linked to global institutions and governance arrangements.

B. Governance and bribery and corruption as predicate crimes

Corruption thrives under poor governance, which provides an environment that is conducive

to bribery, corruption, and other nefarious activities. Presumably, those who seek to benefit

from bribery and corruption would first seek to induce poor governance if it does not already

prevail. Setting up intricate schemes for successfully extracting bribes on a large scale

corrodes governance and inflicts collateral damages on related institutions that normally

promote economic growth and well-being. The handsome returns from this vice generate

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intense struggle which largely detracts from the proper business of governance, as the battle

for private control over public resources takes precedence..

The quest for power is partly explained by the fact that, in Africa as well as in many

resource-rich developing countries, governments exercise near-total control over below-the-

surface resources and has the ability to over-tax agricultural commodities (on-the-surface

resources). Fortifying the challenge raised earlier that financial havens should prove their

raison d'être is other than principally for nefarious purposes, the existing evidence indicates

that for developing countries, there is a correlation between rich endowment in mineral

resources in the context of poor governance on the one hand and illicit outflows to offshore

secrecy jurisdictions on the other hand. With the exception of Ukraine, all the other resource-

rich nations that are both rich in mineral resources and victims of illicit financial flows are in

Africa.

Mahmood Mamdani (2011, p. 1) warns that “[t]he conditions making for external

intervention[s] in Africa are growing, not diminishing.” His perception is predicated on the

rising interest of global powers in Africa’s primary resources. Current estimates of the

continent’s natural resource potential in oil and gas, as well as the magnitude of past

spoliation, as evidenced by the magnitude of illicit flow reported in Boyce and Ndikumana

(2012, pp. 19–-22) suggest that the stakes are extremely high on all sides—the victims, the

spoilers, and foreign interests, including offshore and onshore havens. With regard to the

continent’s natural resource potential, estimates from the U.S. Energy Information

Administration suggest that only 21 out of 54 African countries do not as yet show any oil

and gas potential.17 It would appear that the continent is replete with resources that are in

high demand globally, and future resources are likely to be discovered or become

                                                                                                                         17 See US Energy Information Administration (http://www.eia.gov).

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19    

economically viable. Yet the continent remains impoverished. What is generally referred to

as “poverty in the midst of plenty” continues to plague Africa and carries troubling

implications for peace, stability, and security on the continent. Governance characterized by

adherence to the rule of law is one of the most effective ways to manage this risk. Since

corruption is impeding good governance and poor governance is feeding corruption—

concepts that are mutually reinforcing—the chain must be broken. However, because of

incessant external intervention in Africa, cutting the circular chain is not so straightforward.

To do so requires a global discussion of poor governance.

Like a fish, which is said to rot from the head, the corrosive effects of grand corruption create

grievous collateral damages. The costs of illicit financial flows are not just the plundered

monies lost to foreign jurisdictions, but also include the lost opportunities to use these funds

for local development as well as the impact on governance. Borrowing from epidemiology,

we depict governance as analogous to the body’s immune system and corruption as a disease

that devastates it. Weakened, the body’s defenses become vulnerable to opportunistic

diseases. Whether weakened by corruption or already weak, a poor governance environment

encourages opportunistic crimes, some of which gravely retard social and economic

advancements. To illustrate this point, we consider two instances of grand corruption where it

can be easily imagined that the direct benefit to a perpetrator like a head of state, Chief of

Police or other politically exposed persons (PEPs) pales in comparison to the total economic

and social costs to society.

First, consider Nigeria’s Inspectors-General of Police, Mustapha Adebayo Balogun and his

successor Sunday Ehindero. Balogun, the Nigerian Police Chief from 2002–5, was jailed for

six months in 2005 and fined $30,000 following conviction for money laundering, theft, and

other charges, including widespread corruption amounting to 13 billion naira or 83.2 million

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dollars (in 2005 naira-US dollar exchange rate).18 He spent two of the six months of his jail

time as a patient in the nation’s most prestigious infirmary, Abuja National Hospital, for

some illness.19 The whereabouts of the money recovered from Balogun is still as contentious

(disagreement as to which government agency is in possession) as the amount of money

actually recovered from him (Nairaland Forum, 2011). A particularly devastating aspect of

Balogun’s crime is its impact on institutions. The message implicit in the manner in which

justice was (not) served in Balogun’s high-profile corruption case is a matter of considerable

consequence. The puny punishment given to Balogun for such an egregious crime, while

ordinary folks who commit far lesser offenses serve harsher sentences in far worse prison

conditions, is not lost on Nigerians.20 As the following statement from a respected Senior

Advocate of Nigeria, Femi Falana, makes clear, Balogun’s case has damaged institutions

incommensurably:

. . . it is now the trend to strike out or dismiss charges filed against members of the

bourgeoisie. To that extent, the decision of the Supreme Court should be seen as an

audacious expression of class solidarity. Perhaps, [the] majority of Nigerians are not

aware of the fact that out of the over 400 convictions which the EFCC has secured in

10 years of its existence, only four members of the political class have been

successfully prosecuted through dubious plea bargain deals. In the circumstance,

instead of wasting meager resources allocated to the anti-graft agencies on securing

convictions which are going to be set aside in favor of members of the ruling class, it

is high time the Federal Government stopped charging politically exposed persons

and other influential criminal suspects to court. In the atmosphere of impunity in the

                                                                                                                         18 http://news.bbc.co.uk/2/hi/africa/4460740.stm, Nairaland Forum (2005), and Bolaji (2012). 19 For a more detailed account of Balogun’s egregious crime and puny punishment, see Nairaland Forum (2006:2) Nairaland Forum(2005), Online Nigeria (2006), and Bolaji (2012). 20 See the comments in Nairaland Forum (2006), Online Nigeria (2006, p. 2), and Balogun (2013, p. 3).

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land, judges should equally stop the immoral practice of railroading petty criminals to

jail (Balogun, 2013, pp. 2–3).

Apparently some Nigerians nowadays see anti-corruption moves by the Nigerian government

as a sham perpetrated to punish and disorganize political opponents, secure the loyalty of the

ruling party members, and suborn intransigents.21 Sunday Ehindero, the police chief who

succeeded Balogun, was on trial in 2012 for the embezzlement and misappropriation of funds

donated to the police during his tenure from 2005–2007.22 Using the profile of illicit financial

flows represented in Table 2, it is easy to grasp the likely social consequences of crimes of

this category.23 When funds designed for police welfare are misappropriated, it is an assault

on institutions because police is an important component of “second party enforcement”

mechanisms (North, 2002, p. 3).

Second, in Peru, the Chief of Secret Police, Vladimiro Montesinos, audaciously aimed at the

entire edifice of institutions and organizations that define democracy in Peru (McMillan and

Zoido, 2004). Montesinos deliberately weighed all of the checks and balances in the

country’s democratic structure—the opposition parties, the judiciary, and freedom of the

press—that sustain democracy. He concluded that of all the instruments in the system, the

most potent is free press, and set about weakening it. According to McMillan and Zoido

(2004, p. 69), Montesinos paid a television station owner 100 times the payoff to a judge or a

politician, and five times the aggregate amount of bribe payments to all politicians. Clearly,

criminals understand the nature of the relationship between governance and the predicate

crime of corruption as well as how to strategically exploit such a connection.

                                                                                                                         21Bolaji (2013), OnlineNigeria (2006), Adebowale (2013), and BBC News Africa (2013). 22  http://www.bellanaija.com/2012/09/23/former-ig-of-police-sunday-ehindero-remanded-in-kuje-prisons-for-embezzling-n16million-misappropriating-over-n500million/; Global Reporters Vienna (2013). 23 For a poignant example of observed collateral damages from the Nigerian PEP cases, see the account in Onyeozili (2005, pp. 42-43).

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C. Governance, money laundering and proliferation financing

We are careful to make the distinction between why and how one moves money in the

typology of flows illustrated in Table 1. In that distinction, it is easy to appreciate that the

majority of the funds, legitimate or otherwise, flow through the banking system. Even where

cash smuggling obtains, those funds ultimately end up in the banking system. A challenge

thus arises in reconciling the fact that such a large proportion of money laundering moves

through formal channels with the statement that governments are promoters of anti-money

laundering regimes. One possibility is that local financial institutions are not answerable to

the laws of the states in which they conduct business, and can therefore evade national and

global regulations. We submit that financial institutions can end run around effective

oversight when they operate in a regime that is captive.

Looking at Table 1, hereafter referred to as matrix A for analytical expediency, it is easy to

appreciate how illegitimately-acquired money can pose identification problems for banks

when such money is legally transferred but the true (i.e., illegitimate) nature is unknown

initially (type in the matrix). 24 For this reason and others, FATF 40+9+1

recommendations exist. FATF, the Financial Action Task Force, is the standard setter for

global anti-money laundering and combating the financing of terrorism (AML/CFT) regimes,

particularly the preventive aspects of the mechanism. A set of 50 recommendations now

includes guidelines with regard to nuclear proliferation financing and constitute the global

standard as far as diligence in AML/CFT matters is concerned. FATF recommendations are

                                                                                                                         24 For readers who may not be conversant with matrix representation, the first subscript refers to the row and the second to the column. Together those two subscripts uniquely identify a cell in a contingency table, which we

call a matrix here. So the coordinate refers to the cell l in the first row, second column.

12a

12a

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23    

important because failure to establish in-house mechanisms (at the minimum), even if those

mechanisms are mere formalities, nonetheless can be probative or prima facie evidence of

total disregard for AML measures.25 On the other hand, establishing and applying them

indicate due diligence and can constitute a mitigating factor when a financial institution is

under regulatory scrutiny or investigation for contravention.

Following “know your customer” principles or conducting due diligence can thus reduce the

risk of inadvertently engaging in illicit transactions owing to identification problems of the

type . However, banks do not necessarily adhere to this sensible and ostensibly helpful

course of conduct. In this regard, we cite an example involving a Swiss banking regulator and

Swiss banks to show how regulatory laxity can create incentives for banks to circumvent or

ignore AML rules that have been put in place to protect them and the public. In this example,

the banks were ostensibly engaged in type transactions but had not been diligent, thus

creating reasonable doubts in people’s minds as to how different were the circumstances of

these banks from types and , which are situations in which banks are deliberately or

knowingly engaged in illegal transfers. In November 1999, the Swiss Federal Banking

Commission (SFBC) began “investigations to ascertain whether a total of 19 banks in

Switzerland had fully adhered to due diligence requirements as set out in banking law and

other applicable legislation in accepting and handling funds from the entourage of the former

President of Nigeria, Sani Abacha” (SFBC, 2000, p. 1). Although the majority of the banks

were found wanting, there were no immediate or known direct consequences for the banks.

Of the 17 banks investigated at the time of the report, 5 were fully compliant, 5 had short

comings, and 7 were found to have made serious omissions (SFBC, 2000, pp. 6–10). In the

end, none of the banks were ever sanctioned. The regulator simply expressed regrets at the                                                                                                                          25 On a notorious practical application of this principle, see Reuter and Truman (2004, p. 135) on Riggs National Bank, Washington D.C.

12a

12a

21a 22a

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violations in the expectation that banks would conduct their business with more diligence in

the future.26 The response of the Swiss Banking regulator to the findings of the investigation

leaves open the question of whether or not the regulatory regime is captive

While the Swiss example is open to debate regarding the circumstances of a bank’s

involvement in the handling of illicit funds, such a benefit of doubt would be difficult to

argue in egregious cases where legitimately or illegitimately acquired money is illegally

transferred. According to our Matrix A, these would be transaction types and . We

would like to know how such cases can continue to happen with widespread impunity. In the

next section, we attempt to shed light on some known cases of outright impudence by banks.

D. The vicious circle of governance, illicit financial flows, and governance

In many of the known or revealed cases in which banks have been major actors in money-

laundering processes, the funds involved have been outflows from developing countries.

According to one account, ”[i]n January 2009 US law enforcement fined the British bank

Lloyds TSB $350 million after it admitted secretly channeling Iranian and Sudanese money

into the American banking system. Robert Morgenthau, the Manhattan district attorney,

explained how Lloyds would routinely strip out the identifying features from payments from

Iran so that wire transfers would pass undetected through filters at US financial institutions”

(Shaxson, 2011, pp. 249–50).

Three years after the Lloyds case, HSBC, comprised of HSBC Holdings Plc., incorporated in

the UK, and HSBC Bank USA N.A., a federally chartered banking corporation headquartered

in the Commonwealth of Virginia, “agreed to forfeit $1.256 billion and enter into a deferred

prosecution agreement” with the U.S. Department of Justice (DOJ) for “violations of the

                                                                                                                         26 For a detailed account, see Swiss Federal Banking Commission (2000).

21a 22a

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Bank Secrecy Act (BSA), the International Emergency Economic Powers Act (IEEPA) and

the Trading with the Enemy Act (TWEA).” HSBC admitted to anti-money laundering

violations and illegally conducting transactions on behalf of customers in Cuba, Iran, Libya,

Sudan, and Burma. A four-count felony charge included willfully failing to maintain an

effective AML program, willfully failing to conduct due diligence on its foreign

correspondent affiliates, violating IEEPA, and violating TWEA. HSBC accepted

responsibility for its criminal conduct and that of its employees (see Impartial Review News,

2012 and Lowe, 2013).

Impudence is not limited to a few banks, but is so pervasive that the conduct could be

considered customary practice. Such a characterization would be hardly surprising given the

breadth of secrecy jurisdictions worldwide. To sustain such a high number of secrecy

jurisdictions, there has to be a significant pool of brazen banks feeding the jurisdictions with

the required lifeline—money. The abundance of secrecy jurisdictions can also be indicative

of the global financial system’s appetite for keeping mum—see no evil; say no evil; hear no

evil. According to a report by Global Witness (2009), it would appear that there are a

bewildering number of types , , and transactions which allow banks a wide latitude

for denial when accused of complicity.

. . . a raft of anti-money laundering laws [that] require them to do due diligence to

identify their customer and turn down illicitly-acquired funds. But the current laws are

ambiguous about how far banks must go to identify the real person behind a series of

front companies and trusts. They fail to be explicit about how banks should handle

natural resource revenues when they may be fuelling corruption. And if a bank has

filed a report on a suspicious customer as required by the law, but then the authorities

permit the transaction to go ahead, the bank can legally take dirty money. So it may

12a 21a 22a

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be possible for a bank to fulfil the letter of its legal obligations, yet still do business

with these dubious customers (Global Witness, 2009, pp. 3–4).

Once again, we (a) see the pervasive influence of institutions as elaborated in our definition

of governance and (b) confront examples of organizational conduct that reflect opportunities

provided by institutional settings as predicted in North (1990, 1991). The impudence of

Lloyds, HSBC, and many others such as lawyers, real estate and escrow agents, wire transfer

systems, Union Bank of California, Bank of America, Citibank, PayPal, California National

Bank, City National Bank, Pacific Mercantile Bank, Wachovia Bank, Commerce Bank, JP

Morgan Chase, Fidelity Investments, Chevy Chase, Eagle Bank, SunTrust Bank, American

University, Banco Africano de Investimentos, and Union Bank of Switzerland, to name only

a few, are shaped by incentives.27

There are three noteworthy incentives shaping a trend in the global financial system towards

creating colossal financial institutions that dwarf nation states. These emergent, mammoth

institutions can prove to be extremely costly or impossible to regulate within individual

jurisdictions. First, the existence of boundless, universal banking (product line and

geographic super-latitudes) driven by advances in information communications technology

and the Internet effectively create a supranational virtual marketplace. Second, the resulting

correlations across geography and product lines which can generate unsustainable systemic

risks in some circumstances can be viewed as terrorism-in-banking. For instance when

regulators allow financial institutions to issue cross-default guarantees on financial

instruments held by important investors, it can immunize the bank from failure as in the “too                                                                                                                          27 For details on the duplicity of some of these players in the AML spectrum of activities, see United States Senate Permanent Committee on Investigations (2010) or earlier accounts of numerous other banks in Reuter and Truman (2004, pp. 130–36). The impudence of Riggs National Bank is notorious and needs no elaboration; also see Reuter and Truman (2004, p. 135). American University in Nigeria “accepted over $14 million in wire transfers from unfamiliar offshore shell corporations to pay for consulting services related to development of a university in Nigeria founded by Mr. Abubakar” (Unites States Senate, 2010, p. 5). As the former vice president of Nigeria under the regime of Olusegun Obasanjo, Mr. Abubakar Atiku is clearly a PEP.

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big to fail” doctrine. In such a circumstance, the bank basically has wired itself as a terrorist

would do in order to credibly communicate its demands not to be compulsorily liquidated.

More recent events which we discuss below suggest that the message being communicated

indeed by banks has been understood as intended. The scale of the systemic risks envisaged

marks these behemoths as “too big to fail” enterprises and “too big to prosecute” juristic

persons. Three, the influence of this stratagem is already being felt in the USA and the UK in

at least two ways; there may be others that we are yet to recognize, either because they are

elusive, emergent, or their full implications are still evolving. In the too-big-to-fail case, we

can cite the unprecedented bailout of American International Group (AIG) and big US

money-center banks during the 2008 financial crisis.28 For the too-big-to-prosecute case, this

refers to the so- called “Arthur Anderson myth” and the recent pronouncements and steps

taken by the US Attorney General, Eric Holder. The pronouncement is that Americans should

come to terms with the reality that certain banks are simply too big to prosecute (Huffington

Post, 2013), while the steps are in the growing use of Deferred Prosecution and Non

Conviction Agreements (DPAs and NPAs), the latest instance being the HSBC case (Lowe,

2013).

Some legal scholars disagree with the conventional wisdom that “prosecuting even the largest

and most established of corporations can subject them to terrible collateral consequences

which risk putting them out of business, thereby causing massive social and economic harm”  

(FCPA,   August   23rd,   2012,   p.   1). Markoff finds that “the nearly indiscriminate use of DPAs

with large corporations—in contrast to the DOJ’s continued tendency to prosecute and

convict small companies—that predominates today is not supportable” (FCPA,   August   23rd,  

2012,   p.1). Therefore, the two main reasons for using DPAs—the Andersen Effect and the

supposed inability to gain compliance programs for structural reforms through guilty pleas—                                                                                                                          28 Shaxson (2011) and references therein.

28    

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are largely invalid. The study recommends that prosecutors seek convictions when they can,

use DPAs only when absolutely necessary, and decline to prosecute when they have a weak

case that can only be successfully prosecuted by improperly pressuring the defendant. In

contrast to DOJ’s so-called “balanced enforcement regime,” this alternative, which also can

secure structural reforms, can increase deterrence of corporate crime and operate in a manner

that is more transparent and more respectful of defendants’ rights. As argued further by

Markoff (2012, p. 44), “[s]uch a shift towards increased prosecutions and away from DPAs

would both increase deterrence of corporate wrongdoing and further the interests of justice.”

What is at stake are the incentive structures and their consequences. We see the DOJ as

developing norms to complement the formal rules of enforcement. Judging by the interest

generated, it appears that non-state actors are equally apprehensive of the significance of the

emerging norms (of DPAs and NPAs) as a form of institutional change. Mammoth economic

organizations are reshaping institutions and institutions in turn appear to be bending to the

forces unleashed by these organizations. Unfettered by regulations, ethical considerations, or

political accountability, global financial organizations such as HSBC, AIG, and JP Morgan

are becoming more powerful than national governments because, unlike national

governments, they are not socially and politically held accountable. The confluence of

politics and money makes economic organizations even more influential than they need be,

given that they are not politically accountable entities.29 The centrality of governance to the

business of illicit financial flows appears to be well accepted. We have so far attempted to

elaborate that interface and thereby find lessons that can inform strategies to curb illicit

financial flows. We turn to this aspect in the concluding section.                                                                                                                          29 For readers still harboring any doubts about the corrupting influence of corporations on politics, consult a brief on the Enron collapse by Puscas (2002). Additionally, see the documentary on the musical chairs between Washington and Wall Street in Inside Job (2010), directed by Charles Ferguson. Similarly, as has been noted in Shaxson (2011, pp. 247–9), the City of London is corporate influence in the world’s foremost financial center personified. Lord (2013) draws a parallel between two similar incidents of corporate influence in the 1980s and 2013.

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4. Conclusions and recommendations

Grand corruption is at the core of the nexus of governance and illicit financial flows. It

corrodes governance, which in turn engenders opportunistic crimes. These crimes fester and

fuel the rot that grand corruption engenders. Moreover, the consequences of grand corruption

are multidimensional. First, it is a very profitable predicate crime. Second, it stops other rules

from being enforced lest those interfere with the business of grand corruption. Cognizant that

formal rules are put in place by politicians who specify how they are enforced, we conclude

that, in forcing politicians to turn a blind eye to certain kinds of enforcement because those

may disturb corruption, grand corruption implicitly destroys “institutions as investment” in

growth and development.30

We can further conclude from the analysis developed in this paper that there are at least two

likely antagonistic circles in the illicit flow process—a virtuous circle and a vicious circle—

both rooted in one common factor, namely, the strategic complementarity between corruption

and governance. In the virtuous cycle, good governance curbs corruption. In the vicious

cycle, corruption corrodes governance because poor governance enables corruption. In

considering the implications of these opposing circles, suggesting that good governance fix

corruption, where good governance does not already obtain, only begs the issue. The vicious

circle cannot be displaced by the virtuous circle because they exist in parallel, but opposing

orbits. Thus, they can be considered multiple equilibria. If society happens to land in either of

these states, such a state can endure or self-perpetuate unless a conscious and sustained effort

is made to change the situation. The desired change will not happen spontaneously.

Going forward, the idea that civil society has the power and duty to displace the vicious circle

irrespective of the nature of the political regime is a topic for further research. In a                                                                                                                          30 For more on institutions as investment in development, see Bates (2006) .

30    

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democracy, civil society can and should deliver the required efforts by creating the right

incentives for politicians to care about the consequences of illicit financial flows. The

cognoscenti call this prerequisite political will. But we should emphasize, however, that

politicians do not create political will. They respond to it. It is the governed or those who

consent to be governed who should align the political fortunes of the policymakers to the

consequences of illicit financial flows. All forms of government crave legitimacy. Even in a

dictatorship, the duty of conferring legitimacy on the regime rests with civil society.

Further research on how to enable and sustain a habit of political participation promises to be

a useful agenda for all nations, developed and developing, democratic or otherwise. Civics

used to be on the curriculum and was actually taught as early as primary school. Like the fate

of ethics in business school curricula until its re-emergence after the Enron and Arthur

Anderson fiascos and other corporate governance scandals in 2002, the study of civics seems

to have become relegated to the past.31 If global governance architecture encourages banks to

“do the crime, pay the fine, and do no time,” then the observed, rampant impudence of banks

would be understandable and we would not be surprised should banks increasingly resemble

a police establishment run by ex-convicts. Curbing illicit financial flows in such a

circumstance would be far-fetched; it is already proving to be a daunting task as the US

Attorney General Eric Holder enunciated. Civil society therefore must live up to its

responsibilities.

                                                                                                                         31 Leonce Ndikumana offers this interesting perspective on the demise of civics in schools. One of the reasons why civics education has disappeared from school curricula is that past regimes used it as a propaganda machine, an indoctrination medium, rather than instruction in morality and citizenship. Thus it succumbed during political regime transitions.

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Table 1: Typology of Financial Flows

Why one moves money (Provenance)

How one moves money (Type of transfers)

Legitimately acquired

Illegitimately acquired

Legally transferred

Good Money Dirty Money

Illegally transferred

Dirty Money Dirty Money

Source: Authors’ rendition based on a collection of definitions in Dev Kar (2011), Reuter and Truman (2004), and Baker (2005). Note: Illegitimately acquired money may be known or unknown. For instance, stolen money (illegitimately acquired) can be legally transferred if the true nature or origin of the money is not known or remains unknown.

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Table 2: Matrix of dimensionality of illicit financial flows Crime features

Crime

categories

Cash Intensity

Scale of operations or magnitude of the flows

Severity of damages

Incidence of damages

Drugs Very high Global Extreme Pervasive

Other blue- collar crimes

Depends on

specifics

Depends on specifics

Depends on

specifics

Depends on specifics

Other white-collar crimes

Depends on

specifics

Depends on specifics

Depends on

specifics

Depends on specifics; e.g.,

Arthur Anderson, Enron, and the recent global

financial crisis illustrates the

complex manifolds

Bribery and Corruption

Depends on

specifics

Highly variable

Variable; can be

extreme

Pervasive

Terrorism and Proliferation financing

Depends on

specifics

Variable Extreme Pervasive

Source: Authors’ rendition based on Financial Action Task Force (FATF) typologies & Reuter and Truman (2004). Note: This matrix portrays the dimensionality of illicit flows and hence the social and policy complexity of the problem. In principle, each of these cells can be populated with jurisdiction-specific data. It would not be unreasonable to expect the United Nations Office on Drug and Crime as well as Interpol to aspire to attaining the capacity to provide such a data set.

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Figure 1: Governance Arrangements

Source: Authors’ conceptualization. Composition of non-state actors (NSAs) is drawn from Pereira et al. (2011).